Construction projects are typically characterised by their complexity.
An extensive network of overlapping contractors and a considerable investment of resources need to be employed before payment is received for much of the work.
It is why significant effort goes into ways of improving the whole process of construction, including its funding. As illustrated by an article published in The Engineer on the 31st of January 2019.
But, there is no getting around the fact that construction project finance represents a necessary but significant initial risk. And one that it is essential you get right.
To help, here are answers to some of the most frequently asked questions on the subject.
Can I take a loan to finance the construction project?
At least some of the finance for your construction project may be raised by borrowing.
Just ask us the question, and we’ll be happy to discuss whatever amount you want to borrow. Bearing in mind that the larger the loan the more likely a lender will ask for collateral as security.
So, I need to approach the bank for a business loan?
A bank might be interested in advancing the necessary finance. Especially if any loan is secured against the building works themselves.
Be prepared to support any application with a detailed business plan and cash flow projections. You may also need to wait several weeks for a decision.
You should note that recent data shows that British banks are cutting lending to UK construction companies at the most sustained rate for seven years. Highlighting the pressure on the sector due to uncertainty around Brexit.
Are there alternative lenders?
Yes, there are. Especially if you are in search of unsecured borrowing.
As banks have tended to draw away from lending to small and medium-sized businesses – and those in the construction industry – alternative lenders have stepped into the vacuum. They aim to offer more streamlined application procedures, shortening the time between making your initial enquiry and receiving funds.
From some lenders, we may be able to get you a decision in principle more or less immediately.
Although this needs to be followed by a formal application. During which the financial status of your business and the proposed construction project is assessed. If approval is given the requested loan may be transferred directly to your company bank account within days.
Do I have other construction project finance options?
Yes, you do. For example, on a speculative development project, you may be able to attract investment by a business angel or venture capitalist prepared to take a risk on the financial success of the development.
Can I borrow against the income the construction project is expected to generate?
Factoring may be another way of raising construction project finance. However, this depends on the nature and detailed clauses of your building contract.
In this case, a factor advances a loan based on a percentage of the outstanding invoices receivable from your client or customers.
Receipts may continue to be collected by you in the usual way. With the proceeds used to repay the advance, plus the commission charged by the factor.
Alternatively, it may be the factor’s responsibility to collect payment on the invoices. They then return the balance collected to you, minus the amount initially advanced and the factor’s commission.
This is appropriately known as invoice finance.